Technical Analysis Traps

Technical analysis is an attempt to build strategies based on indicators – lines, points, etc. that draw entry points on the chart. This also includes graphical analysis (psychological points of resistance and support, Fibonacci levels), candlestick analysis and patterns (standardized candlestick formations), etc. Adherents of technical analysis definitely overstate its value.

1. Force Majeure and violation of the wave theory of the market

An indicator is a program written in a programming language (for example, the MQL5 language). It is based on a certain mathematical principle built on different systems of analysis of statistical data. Depending on the specified parameters, this program analyzes statistics for a specified time period and, based on regularities, assumes price behavior.

A comment. Recall 2006 and 2010. The statistics were violated by the 2008 mortgage crisis, and a trader who set the number of bars for analysis would have radically opposite results for 2 and 5 years. You can arbitrarily believe in the wave theory of the market, but perfectly quiet waves do not happen in principle! By the way, here it is worth recalling Brexit on January 15, 2015, when the Swiss National Bank introduced chaos into the market.

Not a single indicator can even predict 99% of how the market will behave. The mathematical algorithm cannot provide for psychology, manipulation and force majeure. Ask the proponents of technical analysis: which oscillator is better and why: stochastic, RSI, MACD? Or something else?

How not to fall into the trap:

There is only one answer: to understand that there are no ideal indicators. And there is no indicator that works perfectly in all market situations. Test, analyze fundamental factors, show flexibility, look for combined tools.

In short, look for your perfect combination and be flexible, not forgetting patience and stress resistance.

2. Herd instinct and slippage

Imagine that you could still find the optimal combination of technical indicators. Perhaps they even ordered a spelling according to their advisor strategy. It doesn’t matter what principle it works on, but you put it in full access. What do you think will happen if everyone uses it at the same time? Well, or simply put, what will happen if, hypothetically, at one moment, at the signal of an adviser, everyone opens a position in one direction? I’m silent already about at whose expense these positions will be satisfied. The consequence of the lack of counterparties to the transaction is slippage.

I agree that the market will simply behave similarly contrary to the indicators. That’s why the hope that free (and paid too) strategies will be profitable and can help you is a misconception.

How not to fall into the trap:

“Free cheese only in a mousetrap.” In most cases, the strategies described on the sites and issued as workers are not. The aim is the same – to attract traffic to the site or to convince a person to register via an affiliate link. But there is no harm from these strategies – this is an excellent simulator for training on a demo account. Download indicator templates, upload to MT4 and learn how to optimize indicator settings on historical testing.

“Paid cheese in a mousetrap seems to be tastier, but the essence of this does not change.” And here everything is much more interesting. At first glance, it seems that paid strategies should work because they are not in the public domain. But think: is it worth selling a working strategy if you can make money on PAMM accounts or social trading? Yes, and there are many examples of fake backtest, but few have heard about monitoring MyFxBook.

There is only one way out: to use basic and combined indicators, to train to combine them with each other, to develop the trading system yourself and optimize it all the time (information with a link on how to optimize trading systems can be found in the conclusion).

Those who know how to make money and have a working strategy are unlikely to share it.

3. Price noise and lag indicators

Price noise is unexplained insignificant price fluctuations in short timeframes. It is difficult to explain the nature of the noise: it can be a delay in quotes, shortcomings of the platform or server hardware of the broker, and the conclusion of small transactions. The price will never have a flat line chart. Alas, price noise affects the operation of indicators that show false signals.

The indicator displays the theoretical behavior of prices on the chart, based on historical statistics. Each last bar can have a significant impact on it, but as long as the indicator reflects information taking into account the last bar, the next bar will already open, which can be fundamentally opposite under the influence of fundamental factors. This is a delay.

How not to fall into the trap:

Use timeframes from M30 and higher.

Analyze the chart with several types of indicators. Do not chase the number of open transactions and profit – accuracy and minimal risk are important.

Avoid retrospective errors and look at past results objectively.

Along with indicators, evaluate fundamental factors.

And one more important rule: you should not be obsessed and change indicators and strategies every day in search of successful entry points. Make your choice in favor of one method and make it work!

Conclusion. Neither fundamental nor technical analysis is a panacea for successful trading. And even more so, one cannot rely only on one or the other. Successful trading involves the use of these types of analysis in combination, but this is sometimes not enough. In addition, a trader must have insight, good reaction, stress tolerance (so as not to lose money at the moment of panic) and remember that institutional capital also controls the market. Yes, making money on speculative price fluctuations is not easy, but everything is possible if you make an effort and do not rely on easy money. In conclusion, some useful links:

Types of costs on Forex and options for their optimization. The article will help to use all types of analysis more efficiently, optimizing trading costs.

Rules for evaluating trading systems. The article will be interesting to those who like technical analysis and prefer trading advisors as well.

The most successful businessmen in the world. A motivational article with life examples of those who did not give up and earned money after 40 years or were able to achieve success by being born in a poor family and not even finishing school from hopelessness.

What to do if a broker offends you. A small guide on what to do if the loss occurred due to the fault of the broker.

There are questions left, you do not agree with the opinion in the article or you have additions – I invite everyone to express and discuss your ideas in the comments!